Parents often work hard to save for their children’s future, but some savings strategies can unintentionally reduce the chances of qualifying for financial aid. The type of account you choose can directly impact the amount of need-based aid your child receives. Certain assets are factored more heavily into financial aid formulas, making it important to understand where your money is stored. By knowing which accounts to be cautious with, you can avoid surprises when tuition bills arrive. Here are seven common investment accounts that could disqualify you from financial aid for your kids — and what to consider instead.
1. Custodial Accounts (UGMA/UTMA)
Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are considered the child’s assets for financial aid purposes. This means they are assessed at a much higher rate than parental assets in the aid calculation. Even a modest balance can significantly reduce need-based assistance. While these accounts offer flexibility and tax benefits, they’re one of the investment accounts that could disqualify you from financial aid for your kids if the funds are substantial. Before funding them heavily, weigh the potential impact on future college costs.
2. Standard Brokerage Accounts in the Parents’ Name
Although assets in a parent’s name are generally assessed at a lower percentage than the child’s, large balances in a taxable brokerage account can still affect aid eligibility. These accounts include stocks, bonds, mutual funds, and ETFs held outside of retirement plans. Because they are readily accessible, they count more heavily in financial aid formulas than certain protected accounts. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if the balances are high. Consider using tax-advantaged college savings plans as an alternative.
3. 529 College Savings Plans Owned by the Student
529 plans are excellent tools for college savings, but ownership matters. If the account is in the student’s name, it’s treated as the student’s asset and assessed at a higher rate. This can make a noticeable difference in the expected family contribution. While 529 accounts are generally favorable in aid formulas when owned by a parent, student-owned plans can still be one of the investment accounts that could disqualify you from financial aid for your kids. To maximize aid potential, it’s often better for parents or grandparents to own the plan.
4. Coverdell Education Savings Accounts
Coverdell accounts allow for tax-free withdrawals for education expenses, but like student-owned 529 plans, ownership impacts financial aid eligibility. If the student is the account owner, the funds are considered their asset. Even when owned by a parent, the balances can still reduce aid eligibility more than some other savings vehicles. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if they are heavily funded. Weigh the benefits of tax-free growth against potential reductions in need-based aid.
5. Trust Funds for the Student’s Benefit
Trust funds, depending on how they are structured, can be counted as either a student or parental asset. In many cases, the value of the trust is factored into the aid formula even if the student cannot access it until a later date. If the trust is irrevocable, it still may impact eligibility depending on the terms. Because of this, trust funds are one of the investment accounts that could disqualify you from financial aid for your kids without careful planning. A financial planner experienced in college funding can help structure trusts more strategically.
6. Savings Bonds in the Student’s Name
Savings bonds, such as Series EE or I Bonds, are considered student assets when owned by the child. Even though they can be used for education and may offer tax advantages, their ownership can hurt financial aid eligibility. The value of the bonds will be included in the formula, potentially reducing the amount of aid awarded. This makes them another example of investment accounts that could disqualify you from financial aid for your kids if the holdings are significant. Transferring ownership to a parent before filing the FAFSA may be worth considering.
7. Real Estate Investments Outside the Primary Home
While your primary residence is generally excluded from the FAFSA asset calculation, other real estate investments are not. This includes vacation homes, rental properties, and land. The equity in these properties can significantly raise your expected family contribution. Because they are often high-value assets, they’re among the most impactful investment accounts that could disqualify you from financial aid for your kids. If real estate is part of your portfolio, consult with a financial aid advisor to understand its effect before applying.
Balancing Savings and Aid Eligibility
The challenge for parents is finding the right balance between saving for the future and preserving financial aid opportunities. By understanding which investment accounts could disqualify you from financial aid for your kids, you can make more informed decisions about where to place your assets. Sometimes, the best approach is to diversify across protected accounts and more flexible investment vehicles. With early planning and the right strategy, you can support your child’s education without sacrificing valuable aid.
Have you reviewed your savings strategy for its impact on financial aid? Share your experiences and tips in the comments to help other parents plan smarter.
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